Why you should set up as a limited company for your business
In the United Kingdom, a limited company is a type of business structure that is legally separate from its owners. This means that the company is responsible for its own debts and liabilities, and the owners are not personally liable for these obligations. Limited companies are required to register with Companies House, the UK’s registrar of companies, and are governed by the Companies Act 2006. There are two main types of limited companies in the UK: private limited companies and public limited companies. Private limited companies are typically smaller, privately-held businesses, while public limited companies are larger, publicly-traded companies.
Starting as a one-man trader can be pretty easy if you’re considering starting a business. But in the long run, you might need to reconsider the advantages of setting up a limited company. There are many reasons to set up a limited company. Here are 10 of the most compelling:
1. Limited liability protection
Limited liability protection means that the personal assets of the owners, or shareholders, of a limited company are protected in the event that the company is unable to pay its debts. This means that if the company is sued or incurs debts that it cannot pay, the creditors cannot go after the personal assets of the shareholders, such as their homes or personal bank accounts. This is in contrast to a sole proprietorship or partnership, where the owners are personally liable for the debts of the business.
Having limited liability protection can provide peace of mind and financial security to business owners, as it can help to protect their personal assets from being seized in the event that the company experiences financial difficulties. It can also make it easier for business owners to take calculated risks and pursue growth opportunities, as they are not putting their personal assets at risk.
2. Increased Tax benefits
Limited companies may be eligible for certain tax benefits, such as the lower corporation tax rate on profits. In the United Kingdom, the corporation tax rate for limited companies is currently 19%, (increases to 26% in April 2023) whereas the highest rate of income tax for individuals is 45%. This means that limited companies can potentially pay a lower rate of tax on their profits compared to sole traders or partners who are taxed at individual income tax rates.
In addition, shareholders of a limited company may be able to take advantage of their annual personal tax-free allowance by receiving dividends rather than salary. Dividends are taxed at a lower rate than salary, so this can result in a lower overall tax bill for the shareholder. However, it is important to note that dividends are only tax-efficient if the company is making profits and the shareholder is a basic rate taxpayer.
It is worth noting that limited companies are required to pay taxes on their profits, as well as other taxes such as VAT and employer’s National Insurance contributions if they have employees. However, the tax benefits of operating as a limited company can still make it a attractive option for some business owners.
3. Creates A Professional Image
Operating as a limited company can convey a sense of professionalism and credibility to clients and customers. It can also make it easier to secure funding and investment from banks and other financial institutions.
Having a limited company structure can signal to potential clients and customers that the business is well-established and serious about its operations. It can also help to differentiate the business from sole traders and partnerships, which may be perceived as less professional by some.
In addition, limited companies may find it easier to secure funding and investment from banks and other financial institutions. This is because the limited liability protection offered by a limited company can make it a lower risk for lenders and investors compared to other business structures. As a result, limited companies may be able to access a wider range of funding options and potentially at better rates.
4. Increased credibility with suppliers
Limited companies may find it easier to establish credit accounts with suppliers, as the suppliers may view the company as a lower risk due to its limited liability status.
As a separate legal entity, a limited company is responsible for its own debts and liabilities. This means that if the company is unable to pay its bills, the creditors cannot go after the personal assets of the shareholders to recover their losses. This can make limited companies a more attractive option for suppliers, as they are less likely to face financial losses if the company is unable to pay.
As a result, limited companies may be able to establish credit accounts with suppliers more easily than sole traders or partnerships, which do not offer the same level of legal protection for the owners. This can be particularly useful for businesses that rely on credit to purchase supplies or materials.
5. Ability to sell shares in your company
Owners of limited companies have the ability to sell shares in the company to raise capital or bring in new business partners. This can be a useful option for business owners who are looking to expand or restructure their company.
By selling shares, a business owner can bring in new investors who can provide capital in exchange for an ownership stake in the company. This can be a good way to raise funds for expansion or other business purposes without taking on debt.
In addition, selling shares can also be a way for business owners to bring in new partners or co-owners who can bring additional expertise or resources to the company. This can be particularly useful for business owners who are looking to bring in new leadership or expand their management team.
It is worth noting that the sale of shares in a limited company is subject to certain legal requirements, such as the need to disclose financial information to potential buyers. However, the ability to sell shares can be a valuable tool for business owners who are looking to grow or restructure their company.
6. Increased potential for business growth
The limited liability protection and other legal protections offered by a limited company can make it easier for business owners to take calculated risks and pursue growth opportunities.
Because the personal assets of the shareholders are protected in the event that the company is unable to pay its debts, business owners may feel more comfortable taking on additional risk in order to pursue growth opportunities. This can include expanding the company, investing in new technologies or equipment, or entering new markets.
In addition, the legal protections offered by a limited company can provide stability and continuity for the business, which can make it easier for business owners to plan for the future and make long-term investments.
Overall, the structure of a limited company can provide a strong foundation for business growth and success.
7. Simplified accounting and reporting requirements
Limited companies are required to keep detailed financial records and produce annual accounts, which can make it easier for business owners to track the financial performance of their company.
In the United Kingdom, limited companies are required to file their accounts with Companies House, the government agency responsible for registering and regulating companies. This includes providing information on the company’s financial performance, such as its profits, losses, and overall financial position.
Having this information readily available can make it easier for business owners to monitor the financial health of their company and make informed decisions about its future direction. It can also provide transparency for stakeholders, such as shareholders and investors, who may be interested in the company’s financial performance.
Overall, the accounting and reporting requirements of a limited company can help to ensure that the business is well-managed and financially sound.
8. Far Easier to transfer ownership
If a business owner wants to sell their company or transfer ownership to someone else, doing so is typically easier with a limited company structure.
Because a limited company is a separate legal entity, the ownership of the company can be transferred simply by selling the shares in the company. This is in contrast to a sole proprietorship or partnership, where the entire business would need to be sold or transferred in order to change ownership.
The ability to easily transfer ownership of a limited company can be particularly useful for business owners who are looking to retire or exit the business. It can also make it easier for business owners to bring in new partners or co-owners if they wish to expand or restructure the company.
Overall, the ability to transfer ownership of a limited company can provide flexibility and convenience for business owners who are looking to make changes to the ownership structure of their business.
9. The ability to pay yourself in dividends
As a shareholder in a limited company, it is possible to take a portion of the company’s profits in the form of dividends rather than salary. This can result in tax savings for the shareholder.
Dividends are payments made to shareholders out of the company’s profits. They can be an attractive option for shareholders because they are taxed at a lower rate than salary, which can result in overall tax savings. However, it is important to note that dividends are only tax-efficient if the company is making profits and the shareholder is a basic rate taxpayer.
Taking dividends rather than salary can also be a useful option for business owners who want to keep their salary expenses low in order to maximize the profits of their company. This can be particularly useful for businesses that are in a growth phase and looking to reinvest their profits back into the business.
Overall, the ability to pay oneself in dividends can be a tax-efficient way for shareholders of a limited company to receive a portion of the company’s profits.
10. You have the potential for continued existence
Unlike sole proprietorships and partnerships, a limited company has the potential to continue operating even if the owner(s) leave or pass away. This can provide continuity and stability for the company’s employees and clients.
Because a limited company is a separate legal entity, it has the ability to continue operating even if the owners or shareholders change. This can provide stability and continuity for the company’s employees, who can continue to work for the company even if the ownership changes. It can also provide reassurance for the company’s clients and customers, who can continue to do business with the company without interruption.
In contrast, a sole proprietorship or partnership would typically need to be dissolved or restructured if the owner(s) leave or pass away, which can disrupt the operations of the business and cause uncertainty for employees and clients.
Overall, the potential for continued existence can be a valuable feature of a limited company for business owners who are looking to build a long-term, stable business.
There you have it: 10 great reasons to set up a limited company! If you’re still undecided, consider that setting up a company is a flexible and cost-effective way to run your business, and it offers a host of other benefits too. So what are you waiting for? Remember we have an amazing offer available to Referandsave readers which gets you a limited company set up and business bank account provided with £75 FREE cash added to your balance. Full details can be found here: Tide Bank Review & Tide Referral Code: REFER75 – Get £75 FREE – This amazing offer won’t last long and is perfect for those of you who have a business or are in the process of starting a business. Literally a 5 minute sign up process with no credit check. 🙂